Why Friday’s payrolls report may disappoint

April 4, 2013

Those who cheered last month’s U.S. labor report and feel better days are ahead for the economy may be disappointed with the latest data due on Friday, contrary to what some economists say.

The consensus from a Reuters poll of 71 economists is for 200,000 jobs to have been created in March. The strong forecasts come on the back of the 236,000 jobs gained in February when economists had predicted only 160,000.

That may be too hard to realise especially since data since then has thrown enough reasons to doubt a strong rebound.

The number of Americans filing new claims for unemployment benefits hit a four-month high last week, suggesting the labor market recovery lost some steam in March. The Chicago PMI, a key indicator of factory activity in the mid-west, also pointed to slower growth in March with a reading of 52.4 versus expectations of 56.5.

And although the ISM manufacturing employment index ticked higher in March, meaning the pace of hiring accelerated from than the month before, the latest ADP employment report showed only 158,000 new jobs.

The conflicting data has already caused economists to flip-flop on their calls.

This is what Joseph LaVorgna, chief economist at Deutsche Bank wrote in a note last week:

While at first glance the backup in jobless claims and loss of momentum in the Chicago PMI appear to validate those concerns (of a mid-year soft patch), we do not believe this is truly the case.

For policymakers to begin shifting toward a QE taper, they will likely need to be assured that the labor market is … not repeating a mid-summer swoon.

Deutsche Bank initially had a forecast of 200,000 for payrolls. After the ADP employment report, he chopped the forecast to 160,000 and wrote:

We trimmed our employment forecast because the ADP survey for March showed a smaller than expected increase…. March was unusually cold – the coldest March since 1996. This was something we warned about previously.

The economy is in much better shape than during the financial crisis when millions of Americans were forced out of work, thanks in part to expansive monetary policy by the Federal Reserve.

While thousands of ordinary citizens are now finding their way back into jobs, much is yet to be done for employment levels to crawl back to levels seen before the crisis. Adding 200,000, or even more, new jobs a month might just be the ticket.

But whether that trend will have emerged is not at all certain.

There is another statistical coincidence to Friday’s release. The U.S. economy has added over 200,000 jobs in every February for the past three years, causing forecasters to predict numbers as good or better the following month.

But, as was the case last year, new jobs in March actually failed to follow through. Only 143,000 jobs were added in that month after 259,000 in February 2011.

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